Data & Research May 8, 2019

Pre-Retirees Overestimate Social Security Benefits by 28%

Just over one-quarter of adults think they can live comfortably on Social Security alone, according to a survey by the Nationwide Retirement Institute.

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Pre-retirees, those within 10 years of retiring, expect they will receive $1,805 a month in Social Security benefits, but retirees actually collect an average of $1,408, a 28% difference, according to the sixth annual survey by the Nationwide Retirement Institute. Twenty-six percent believe they can live comfortably on Social Security alone, and 44% say that it will be their main source of retirement income.

Seventy percent think they are eligible for full benefits before they actually are. On average, they incorrectly think they will be eligible for full benefits at age 63, and 26% think that even if they claim early and receive lower benefits, these benefits will rise once they reach full retirement age.

On average, retirees say they began collecting Social Security at age 62. The reason they gave for taking Social Security benefits early were to pay for living expenses (61%), to supplement their income (36%), or because they faced health issues (22%).

Future retirees plan to begin collecting benefits at age 65, thereby forgoing higher Social Security benefits were they to wait until age 70. Recently, a professor at the UCLA Anderson School of Management discussed biases that discourage employees from waiting to claim Social Security and potential messaging to address those biases.

“Social Security is one of the most confusing retirement topics that America’s workers are facing today,” says Tina Ambrozy, president of sales and distribution at Nationwide. “Our survey reveals that fewer than one in 10 older adults know what factors determine the maximum Social Security benefit an individual can receive.”

Sixty-six percent of future retirees worry about Social Security running out of money in their lifetime. Forty percent think there will be cuts under the current administration, and 83% think the Social Security system needs to be reformed.

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Among those who recommend changes to the Social Security system, 53% think higher earners’ taxes should increase. Even those with more investable assets agree. Fifty-five percent of those with $250,000 or more and 48% of those with $1 million or more believe higher earners’ taxes should increase.

“Many people feel the best way to improve the Social Security program is to raise taxes on high earners to increase funding,” Ambrozy continues. “Interestingly, our survey reveals that 69% of future retirees were surprised to find out a person making $150,000 a year pays as much in Social Security taxes as millionaires.”

Only 22% of future retirees have a formal, written retirement plan, and 33% say they did less Social Security planning because it is too confusing.

Thirty-seven percent of future, 28% of recent and 30% of longer-term retirees work with a financial adviser. They say they receive 15% more in benefits ($1,551 versus $1,324). Forty-six percent of future retirees working with an adviser have discussed Social Security strategies with them.

Among those working with an adviser who have not received advice on Social Security, 34% say they expect to receive such advice. Seventy-six percent say that if their adviser did not speak with them about maximizing Social Security benefits, they would switch advisers.

The Harris Poll conducted the online survey for Nationwide in February among 1,315 adults.
Data & Research May 8, 2019

Insights Into How to Better Communicate Lifetime Income

A professor at the UCLA Anderson School of Management discussed biases that must be considered when helping people make retirement income decisions.

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Say the word “annuity” and many people turn up their noses, yet are anxious to take their Social Security benefits as soon as they can. What can help more people embrace something that guarantees lifetime income and delay taking Social Security so they can have greater income in retirement?

How to communicate trade-offs is one answer, according to Suzanne Shu, associate professor of marketing at the UCLA Anderson School of Management.

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Shu told attendees of the Plan Sponsor Council of America’s (PSCA) 2019 Annual Conference that although single-life annuities remove the risk of people  outliving their savings, those who don’t favor annuities are risk-averse. The risk they fear is dying before they get paid all their benefits. But, Shu said these folks are thinking of the way variable annuities work, not fixed annuities.

Shu discussed a research study, in which she was involved, that offered subjects a choice of three annuity options for which they could invest $100,000 at age 65. Recognizing individuals’ fear of dying before obtaining all annuity payments, all options were period-certain annuities. For example, the first had monthly payments starting at $400 and a 7% annual increase in payments for 30-years period certain—meaning if the annuitant died before 30 years, the remaining payment would go to a beneficiary. Of the three options, one used a $400 increase in payments rather than a percentage.

One thing Shu noted was with just basic information about the choices, more than one-third (36%) chose “if these were my only options, I would defer my choice and continue to self-manage my retirement assets.” Also, two in 10 chose an option with a set dollar amount annual increase in payments, and the biggest share of subjects chose an annuity option with the least period certain years and a 5% annual increase in payments rather than a 7% annual increase.

When study participants were given enhanced information—such as how much total the annuity will pay out over time and a table of payment amounts at different ages—to show the compounding of the percentage annual increase, more people chose annuities and many who first chose a dollar amount annual increase moved to the 5% annual increase. Still, nearly one-quarter (24%) chose no annuity.

Shu also told conference attendees that the majority of people declare Social Security at age 62—the earliest age at which they can take it. Claiming falls after that age with a slight spike at around age 66, the current Social Security retirement age, but few delay taking it until age 70 or later. “Many think, ‘That’s my money the government is sitting on; I want it back,’” she said. The strong sense of ownership is one reason people are so eager to claim Social Security early.

Another reason is the same risk aversion as with annuities, according to Shu. People don’t want to pass away before they get all their money, but they don’t consider how long they will live. In a study, people were first asked a series of questions about their chances of dying by certain ages. Later, the very same people were asked about their chances of living to certain ages. “There was a 10-year gap in the median expected age of death; people have a much higher life expectancy when they are asked about the chance they will ‘live-to’ a certain age,” Shu said.

Shu’s research has found that convincing people to claim Social Security at a later age is difficult with messaging, but there are some measures that have worked. For example, communicating to people that delaying the age they declare is a good idea for their financial well-being, telling people to consider the implications of living longer in retirement and letting them know about how many people regret claiming early all had significant impacts on individuals’ claiming age decisions.

Shu said helping individuals with decumulation decisions is harder than with accumulation decisions. Individual differences matter, from goals for retirement, to health condition and life expectancy. There is no one-size-fits-all decumulation product or plan, and communications about decumulation should not be either.

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